Power Integrations (POWI) Balu Balakrishnan on Q1 2016 Results - Earnings Call Transcript

| About: Power Integrations, (POWI)

Power Integrations, Inc. (NASDAQ:POWI)

Q1 2016 Earnings Call

April 28, 2016 4:30 pm ET

Executives

Joe Shiffler - Director, Investor Relations & Corporate Communications

Balu Balakrishnan - President, Chief Executive Officer & Director

Sandeep Nayyar - Vice President, Finance & Chief Financial Officer

Analysts

Vincent Celentano - Raymond James & Associates, Inc.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Ross C. Seymore - Deutsche Bank Securities, Inc.

Evan Wang - Stifel, Nicolaus & Co., Inc.

Operator

Good afternoon. My name is Aaron and I will be your conference operator today. At this time, I would like to welcome everyone to the Power Integrations' First Quarter 2016 Earnings Conference Call. Thank you. Joe Shiffler, Director of Investor Relations, you may begin your conference.

Joe Shiffler - Director, Investor Relations & Corporate Communications

Thank you, Aaron. Good afternoon. Thanks for joining us to discuss Power Integrations' financial results for the first quarter of 2016. With me on the call are Balu Balakrishnan, President and CEO of Power Integrations; and Sandeep Nayyar, our Chief Financial Officer.

During today's call, we will refer to financial measures not calculated according to Generally Accepted Accounting Principles. Please refer to today's press release available on our website at investors.power.com, for an explanation of our reasons for using such non-GAAP measures, as well as tables reconciling these measures to our GAAP results.

Our discussion today, including the Q&A session, will include forward-looking statements reflecting our forecast of certain aspects of the company's future business and financial results. Such statements are denoted by words like will, would, believe, should, expect, outlook, estimate, plan, goal, anticipate, forecast and similar expressions that look toward future events or performance.

Forward-looking statements are based on current information that is dynamic and subject to abrupt changes. Our forward-looking statements are subject to risks and uncertainties which may cause actual results to differ materially from those projected or implied in our statements. Such risks and uncertainties are discussed in today's press release and in our most recent Form 10-K filed with the SEC on February 11, 2016. This conference call is the property of Power Integrations, and any recording or rebroadcast is expressly prohibited without the written consent of Power Integrations.

And now, I'll turn the call over to Balu.

Balu Balakrishnan - President, Chief Executive Officer & Director

Thanks, Joe, and good afternoon. 2016 is off to a good start for Power Integrations with non-GAAP earnings of $0.50 per share for the first quarter, up from $0.43 a year ago. First quarter revenues were $85.3 million, up 3% year-over-year. That growth rate, while modest in absolute terms, compares favorably to the declines reported by many of our peers in the analog sector.

Our year-over-year growth in March quarter was driven mainly by adoption of our InnoSwitch products, which continue to win a sizable share of the rapid charging opportunity for mobile devices. Nearly all major handset OEMs that have adopted rapid charging are now using InnoSwitch in high volume and we expect this business to ramp further in the months ahead.

We expect rapid charging to be a growth driver well beyond the current quarter and even the current year as charging speed becomes an increasingly important feature in mobile devices and new technologies such as USB PD, direct charging and Type-C connectors drive the need for increasingly innovative power conversion ICs. Our technology is extremely well suited for rapid charging and we have firmly established our company as a leader in this emerging ecosystem.

Over the past several years, we have partnered with Qualcomm on their Quick Charge protocol, which has garnered a substantial share of the rapid charging market. In February, we announced a joint reference design with Cypress Semiconductor for a 20-watt USB PD rapid charger utilizing InnoSwitch-CP, which is designed specifically for protocols like Quick Charge and USB PD. This reference design has already been downloaded more than 2,000 times, far ahead of our normal pace for this sort of design collateral, indicating that participants in the rapid charging ecosystem are increasingly looking to partner with Power Integrations.

But, as we have discussed on earlier conference calls, InnoSwitch is far more than a charger chip. Just like earlier flagship product lines TOPSwitch, TinySwitch, and LinkSwitch, InnoSwitch is a broad line power conversion IC featuring breakthrough technologies with the potential to revolutionize power supply design. And while we are excited about the revenue growth we have achieved in mobile devices, our success in that market is even more meaningful as an indicator of the broader potential of the InnoSwitch product portfolio, which continues to expand.

In just the past few weeks, we have introduced InnoSwitch-CE, optimized for the strict standby requirements of consumer electronics, and the 900-volt InnoSwitch-EP targeting embedded power supplies for industrial applications like three-phase utility meters and for use in emerging markets, where the power grid tends to be unstable and voltage surges are common.

Later this year, our next generation InnoSwitch will extend the product's reach to higher power levels, bringing the benefits of InnoSwitch to a wider range of AC to DC applications. We will also introduce a new line of IGBT drivers that marry our high power and low power technologies to address applications up to 100 kilowatts, roughly doubling the size of our addressable market for IGBT drivers and delivering the first major product synergies of the CT-Concept acquisition.

As we have expanded the InnoSwitch product's portfolio and broadened the range of addressable applications, the level of interest among customers has been extremely promising. Over the past several months, hundreds of power supply engineers have attended InnoSwitch design seminars that we have hosted across Asia, Europe and the US and our pipeline of design activity continues to build.

We now have designs ongoing in well over 40 different power supply applications, including a broad array of industrial applications as well as consumer appliances, TVs, networking equipment, and many others. While design cycles for these applications tend to be longer than in the charger market, we think InnoSwitch will ultimately prove even more successful in these markets, thanks to its reliability, energy efficiency benefits, which are often of paramount important in appliance and industrial applications.

Returning to the near-term outlook, while macroeconomic conditions remain uncertain at best, recent order activity has been encouraging and our revenue growth appears to be accelerating in the second quarter. We are projecting revenues of $88 million to $94 million for the June quarter, which should be up 7% year-over-year at the midpoint of the range and also up 7% on a sequential basis. We expect much of the sequential growth to come from the continued ramp of rapid charging applications with an additional contribution from high power, which should see seasonally higher revenues in Q2.

We expect growth in high power to continue into the second half of the year, with revenue contributions from recent design wins for electric buses in China and high-voltage DC transmission lines in both China and Europe, as well as continued growth in renewable energy.

LED lighting should also contribute growth in Q2 and beyond on the strength of new products such as the recently introduced LYTSwitch-3 as well as other new lighting products we will be rolling out in the months ahead as we continue to refine our product offerings in the increasingly fragmented lighting market.

The broader industrial space also has a number of attractive vertical opportunities where we expect to see growth this year, including charges for electric bikes as well as lawn equipments and other power tools which are increasingly moving towards battery power in place of gasoline and plug-in electric. We're also increased by the strength we saw in consumer appliances in Q1 after a weak fourth quarter and a flattish year in 2015. With excess inventories apparently flushed from the supply chain, we expect to see a resumption of growth in appliances this year as tighter energy efficiency specs and increased adoption of electronic features drive higher dollar content and a greater need for integration.

And with that, I'll turn it over to Sandeep for a review of the financials.

Sandeep Nayyar - Vice President, Finance & Chief Financial Officer

Thanks, Balu, and good afternoon. Our first quarter results are fairly straightforward, so I will quickly touch on a few highlights before we take your questions. As usual, my remarks will focus mainly on the non-GAAP numbers, which are reconciled to the corresponding GAAP figures in the tables accompanying our press release.

Q1 revenues were $85.3 million, down 2% from the prior quarter, consistent with the seasonal pattern stemming from the Lunar New Year holiday. Communications revenues declined sequentially driven mainly by seasonality in wireless routers. Computing revenues also declined reflecting typical seasonality, as well as continued weakness in that particular end market.

Industrial revenues fell just slightly versus the prior quarter mainly reflecting seasonality in high power and LED lighting. These declines were largely offset by double-digit sequential growth in the consumer market, driven by strength in appliances where we saw a snap back from the inventory correction that caused some softness in the fourth quarter.

On a year-over-year basis, revenues grew 3% led by double-digit growth in communications, which in turn was driven by rapid charging. Consumer revenues grew mid single digits on strength in appliances, while industrial revenues increased slightly from the year-ago quarter. Unsurprisingly, computing was the only end market that failed to grow year-over-year.

Revenue mix for the quarter was 39% consumer, 32% industrial, 23% communication, and 6% computer. That's a significant shift from the prior quarter with a 5 point increase in the percentage of sales coming from the consumer market and a 3 point reduction in communication market.

This change in mix had a favorable impact on gross margin, which came in above our forecast at 51.6% on a non-GAAP basis. Non-GAAP operating expenses were $29 million, up modestly from the fourth quarter reflecting the seasonal effects of the holiday shutdown in December and the resumption of FICA taxes. From a year ago, operating expenses fell by 2% as a result of our efforts to contain spending in light of challenging demand conditions.

As we indicated on last quarter's call, we do expect a pick-up in operating expenses this year, most notably in R&D as we work to deliver the larger than usual number of new products currently in our pipeline. Our Q2 expense forecast is approximately $31 million on a non-GAAP basis, which would be an increase of $2 million sequentially, but still just a modest year-over-year increase.

The non-GAAP tax rate was just over 4% as expected reflecting the inclusion of the now permanent R&D tax credit. All-in, non-GAAP income was $0.50 per diluted share, up 16% from a year ago. Sequentially earnings were down from $0.58 per share in the prior quarter, which included a $0.05 tax benefit as we recognized the full-year R&D tax credit within the fourth quarter.

Looking at the balance sheet, cash and investments increased by $11 million during the quarter to $185 million. Cash flow from operations was $20.3 million, while CapEx totaled just over $2 million. We bought back 138,000 shares during the quarter for $6.1 million for an average price of just less than $44 per share and we paid out $3.7 million in dividends after raising our quarterly dividend to $0.13 per share. Inventory on our balance sheet decreased for the fourth consecutive quarter, falling to 98 days on hand, down nine days from the prior quarter. That's near the bottom of our target range, so we do expect inventory to rebound somewhat in the June quarter.

Looking ahead, we anticipate healthy sequential revenue growth in the second quarter with a range of $88 million to $94 million. In percentage terms, that's a growth of roughly 3% to 10% sequentially. We expect the biggest growth drivers in Q2 to be increased shipments of InnoSwitch products into rapid charging design. As a result, we expect the Q2 end market mix to more closely resemble the mix we had in the December quarter, which is less favorable from a margin standpoint. Specifically, we expect non-GAAP gross margin for the June quarter to be between 50.5% and 51.0%.

Non-GAAP operating expenses will be sequentially higher reflecting annual merit increases, which took effect in April, as well as higher R&D spending as mentioned previously. Again, we expect non-GAAP expenses for the June quarter to be around $31 million. Lastly, I expect the non-GAAP tax rate to remain in the range of 4% to 5% in Q2 and for balance of the year.

With that, I will turn it back over to Joe.

Joe Shiffler - Director, Investor Relations & Corporate Communications

Okay. Thanks, Sandeep. We're ready to open it up for Q&A now. Aaron, would you please give the instructions for the Q&A session?

Question-and-Answer Session

Operator

Your first question comes from the line of Steve Smigie of Raymond James. Your line is open.

Vincent Celentano - Raymond James & Associates, Inc.

Thanks. This is Vin Celentano on for Steve. I had a question about InnoSwitch as far as, I guess at this point of time, what is revenue in terms of not smartphone related? I mean how do you see that shifting over time? It sounds like the new generation of InnoSwitch applies to more of a higher voltage, so I think this would mean a higher share of not smartphone application, so you kind of speak forward to that.

Balu Balakrishnan - President, Chief Executive Officer & Director

At the moment, the non cell phone revenue for InnoSwitch is very small. It is negligible, because it takes approximately nine months to a year before the products go into production and we only introduced the device for the non-cell phone market in late 2015. So, we don't expect any revenue until late this year and again, that will be small; only next year, you will see significant revenue.

Vincent Celentano - Raymond James & Associates, Inc.

Okay, thanks. And then looking at the LED market, I thought that you saw a bit of a decline in the quarter. Could you talk about if it's grown at all year-over-year and then your overall expectations for 2016?

Balu Balakrishnan - President, Chief Executive Officer & Director

I did grow year-over-year. I believe it also grew in Q4. Q4 and Q1, it grew year-over-year.

Vincent Celentano - Raymond James & Associates, Inc.

Okay, great. Do you have any expectations for 2016 for LED?

Balu Balakrishnan - President, Chief Executive Officer & Director

We do expect it to grow in 2016 over 2015. There are a couple of good reasons for it. One is, if you remember in 2015, we walked away from the lower-end commoditized market for light bulbs in Asia and that transition is pretty much over now. That was a significant headwind for us in 2014 and 2015.

And now, we are focusing on the higher-end bulbs and the commercial industrial market, and we are seeing a pick-up there as a result of products that we are now specifically targeting to those markets. We introduced a product called LYTSwitch-3 and we will be introducing additional products, and that has a pretty fast design cycle. So, we expect to see an increase in LED revenue this year.

Vincent Celentano - Raymond James & Associates, Inc.

Okay, great. Thank you very much.

Balu Balakrishnan - President, Chief Executive Officer & Director

You're welcome.

Operator

Your next question comes from the line of Evan Wang of Stifel. Your line is open.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Yes, hi, it's actually Tore Svanberg from Stifel. The first question is, in the past, you have talked a little bit about your design wins in rapid charge. Would you care to update us on that, obviously not naming companies, but the actual number?

Balu Balakrishnan - President, Chief Executive Officer & Director

Sure. Hi, Tore. We have design wins in rapid charging in literally all large OEMs who are using rapid charging today. And this includes the Korean players, the Chinese players and even a European player, I would say. So, that's doing very well. Now, you were asking specifically the actually numbers – what was your question on the numbers?

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Yes, I think in the past, you've talked about 10, 15 different models using your technology. I was just wondering if there's enough to update there.

Balu Balakrishnan - President, Chief Executive Officer & Director

Well, there are many models even within each one of the large customers, and those models don't necessarily correspond to the cell phone models. But I would say one of the leading cell phone models that was introduced recently in China that's doing extremely well, uses our InnoSwitch as a rapid charger.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Very good. And when would you expect USB PD to become a more material part of the market? We're kind of hearing mixed reviews there. Some say this year, some say next year. What's your current take on USB PD?

Balu Balakrishnan - President, Chief Executive Officer & Director

From everything we are hearing from customers, it's going to be negligible this year, if at all. The earliest I think it will ramp is next year. There are a couple of reasons for it. One is the standard is still going through some changes and it's getting close to being finalized and we expect that starting next year, people will start adopting USB PD.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Very good. And moving on to your consumer business, so you talked about an inventory correction in Q4 sort of being behind you now. You saw growth. How about beyond that? Is there maybe some new products fueling the recovery in consumer as well?

Balu Balakrishnan - President, Chief Executive Officer & Director

Absolutely. We expect for the whole year consumer to grow for a couple of reasons. One is even though the consumer market as a whole is not growing in terms of unit volume of appliances, the content that we sell into these appliances is continuously increasing because there are more electronic features being added, including IoT, and that requires some additional functionality and power. It also requires higher energy efficiency to meet the standards that are out there. So the more features you add, you have to be more efficient. And so, we expect the content to grow, especially when they start using InnoSwitch, our ASP will increase. So we think the consumer market has growth ahead for us, not necessarily for other people.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Very good. Last question for Sandeep. You talked about bookings holding up pretty well. You talked a little about your visibility for the June quarter. You probably don't want to share with us your backlog number, but just sort of relative visibility, how you feel about orders going into the June quarter.

Sandeep Nayyar - Vice President, Finance & Chief Financial Officer

So as you know, in Q1, pretty much similar to last year, we shipped in much more than the recognized revenue which is kind of reflected in our weeks in the channel going to about 7.2 weeks versus the 6.5 weeks we had. And we also, as we indicated earlier, had more design wins that were ramping in the rapid charging. So, that along with the backlog that we have seen makes us feel relatively comfortable to the guide we're giving.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Very good. Great job guys. Thank you very much.

Balu Balakrishnan - President, Chief Executive Officer & Director

Thanks, Tore.

Operator

Your next question comes from the line of Ross Seymore of Deutsche Bank. Your line is open.

Ross C. Seymore - Deutsche Bank Securities, Inc.

Hi guys, thanks for letting me ask a question. Just wondered, an earlier question asked about InnoSwitch revenues outside of phones. Can you talk about what it is overall as a percentage of your revenues, absolute dollars, whatever metric you are willing to share?

Balu Balakrishnan - President, Chief Executive Officer & Director

I think we have said in the last conference call that we grew, we quadrupled our revenue in 2015 from the revenue we had in 2014 which was roughly about $5 million. We quadrupled in 2015. And for this year, we think that in dollar terms, it will be a similar growth as last year. It won't quadruple obviously, because we have the larger revenue now, but in dollar terms it will be a $12 million to $15 million increase from last year.

Ross C. Seymore - Deutsche Bank Securities, Inc.

And then as we think about the mix of the business going forward and especially as you layer in some of the new products with the cost down version of InnoSwitch and then InnoSwitch going into new markets, whether, Balu or Sandeep, however you want to answer this, how do we think about gross margin if the biggest growth driver in 2016 comes from InnoSwitch and from what you said earlier, mainly in handset-driven applications?

Sandeep Nayyar - Vice President, Finance & Chief Financial Officer

So, I think for this year, if you remember, we talked about that we will hover around 51% give and take depending on the mix. And you have seen that we were above that in Q1, mix going the other way a little bit down. So I think we will – for this year, we're going to hover around the 51%. Now, we are going to get a bit of a challenge in Q4 of this quarter because, as you know, the yen has moved against us and it will flow a little unfavorably and be a little bit of a headwind by Q4. I think if you're looking at from a long-term perspective, with all the products that we have in the pipeline, I think our model from a long-term still stand in the 50% to 55%.

Ross C. Seymore - Deutsche Bank Securities, Inc.

And I guess this is my last question, one for you Sandeep. You guys did a great job in the first quarter; the second quarter goes up a little bit but still less than what I had expected. How should we think of OpEx as we transition through the year? Is kind of somewhere around that 31%...

Sandeep Nayyar - Vice President, Finance & Chief Financial Officer

Yes. I would hover around the 31% give and take. So slightly up to slightly – hovering around there.

Ross C. Seymore - Deutsche Bank Securities, Inc.

Got you. Congrats on a great quarter. Thanks, guys.

Sandeep Nayyar - Vice President, Finance & Chief Financial Officer

Thank you.

Balu Balakrishnan - President, Chief Executive Officer & Director

Thanks, Ross.

Operator

Your next question comes from the line of Evan Wang with Stifel. Your line is open.

Evan Wang - Stifel, Nicolaus & Co., Inc.

Yes, thank you for taking my question. You talked about in your prepared remarks some strange thing in China for high power. I was wondering if you can give us some comparison against what your expectation earlier in the year that the Chinese Government might be resuming its infrastructure spending as part of the stimulus program and how is that looking now for 2016?

Balu Balakrishnan - President, Chief Executive Officer & Director

It is actually looking very good. They have resumed investment in infrastructure. There are number of new high-voltage DC transition lines being installed in China. In addition to that, they are converting their public transportation, which is buses, into electric buses starting from Beijing and Shanghai where they have the most pollution, and we have actually a significant portion of that business that we have won on and we expect that to contribute to our growth this year and next year.

The other area we're seeing really good growth, which is not related to government spending, but related to their electrification of motor bike -- actually scooters I should say. China is really pushing hard on converting public to – I mean, the private transportation also into electric vehicles. And one of their pushes is to convert -- get rid of all of their scooters and motorcycles, and replace them with electric bikes. And these electric bikes, we have won again very significant design for charges for these bikes. And it actually uses our TOPSwitch product and it's growing very nicely for us.

Evan Wang - Stifel, Nicolaus & Co., Inc.

I agree, thank you for that clarification. I have one more question, which is on your stock-based composition. It looks like it's up a bit more this quarter and I was wondering if you can talk about the reason behind it being higher, and what the trend might be for the remainder of the year?

Balu Balakrishnan - President, Chief Executive Officer & Director

Evan, if you remember in the last couple of years, you know, our stock comp was lower because, if you remember, we have not achieved the targets we have and that's why the performance-based stock comp was not – we didn't have. But, this year, based on what we are seeing, that is the difference we're going to see and that is the difference why you'll see an increase in stock-based compensation.

Sandeep Nayyar - Vice President, Finance & Chief Financial Officer

Yes. Just to add, a significant portion of our stock-based compensation is tied to our performance. And last two years, we didn't meet our performance goals. So, our stock compensation was substantially less. But this year, we think we are going to do well and in the beginning of the year, we have to forecast what we think we are going to do and based on that, we will take the stock expense. As we go through the year, we will fine-tune it based on what we will end up achieving. So, you may see plus or minus going forward. But usually, in the beginning, we assume more optimistically and then adjust it down, as needed through the year.

Balu Balakrishnan - President, Chief Executive Officer & Director

What also happens, it will ramp up slightly starting Q2 because the executive grants happen somewhere in the middle of Q1, but the rank and file happen more in Q2. So, you will see a slight ramp up from the Q1 numbers.

Evan Wang - Stifel, Nicolaus & Co., Inc.

Okay, great, thank you very much.

Balu Balakrishnan - President, Chief Executive Officer & Director

You are welcome.

Operator

There are no further questions at this time. Mr. Joe Shiffler, I turn the call back over to you.

Joe Shiffler - Director, Investor Relations & Corporate Communications

Okay, Aaron, thank you. Thanks everyone for listening. There will be a replay of this call available on our web site at investors.power.com. Thanks again for listening and good afternoon.

Operator

This concludes today's conference call. You may now disconnect.

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